What can we learn from the Celestia and Polychain sell-offs?

Author: Pavel Paramonov, founder of Hazeflow; Translation: Jinse Finance xiaozou

This article analyzes the recent Celestia and Polychain sell-offs - Polychain sold $242 million worth of TIA. I think this is both a good thing and a bad thing. This article will explore the reasons and what lessons we can learn from it.

1. Do you expect investors not to make money?

Many people (including excellent researchers) described this as extremely predatory and erratic behavior by Polychain. How could a company that is considered a first-tier fund dump such a large amount of its holdings into the open market to impact the price of the coin?

First of all, Polychain is a venture capital fund whose job is to profit from assets purchased during periods of illiquidity (I can’t believe I even need to explain this).

Not only did Polychain take the risk of investing in Celestia at its early stage, but it also bet on the then-new concept of "external data availability layer". This concept was quite advanced at the time and many people did not believe it (especially those in the "Ethereum camp").

Imagine someone discovering Spotify in 2008 and believing that people would listen to music through streaming services instead of CDs and MP3 players, this person would definitely be regarded as crazy. This is the fundraising situation when you are not only the newcomer in the industry, but also want to open a new market in the field of data availability throughput.

Polychain’s job is to take risks and get rewards, just like everyone else. Founders take the risk that their companies may fail, and ordinary people also take certain risks when they make choices every day.

We all make choices and take risks, the only difference is the nature and scale of the risks.

Polychain is not the only investor, there are many other venture capital funds involved.

Interestingly, no one blames them because their transaction data is more difficult to track.

But Polychain’s sell-off alone was not enough to cause such a dramatic price crash. It must be pointed out that this accusation against Polychain alone is unfair for the following reasons:

• Their job is to take risks and make money, and they are doing a pretty good job.

• They are not the only ones selling, other investors are also taking action.

Are these actions good for investors? Of course.

Are these actions ethical for the community? You know.

2. Do you expect the team not to make money?

Well, you might really think so. There is a serious profitability problem in the crypto space: most protocols are not profitable, and they don't consider profitability at all. According to DefiLlama, Celestia currently only earns about $200 a day (equivalent to the daily salary of a senior software engineer in Eastern Europe), while issuing about $570,000 in token incentives.

This is just the team's on-chain profit and loss data. We know nothing about its off-chain profit and loss, but I believe that the operating costs of a team of this size are also quite high. Nowadays, there are indeed some KOLs who seriously declare: "Web3 protocols should be profitable, and companies should make money." Are we crazy to take this view seriously?

Yes, we are crazy, but the core problem is not the business model. The key is that the team regards token sales as profits and builds a business model around this, but never considers the consequences. If token sales are equal to business models, then why do we need to consider business models and cash flow? Right? But the thing is, investors’ money isn’t infinite, and neither are tokens.

At the same time, venture capital is all about betting on startups with huge potential for success. Many companies aren’t profitable, but they may offer something revolutionary or interesting enough to attract others to explore and develop the idea.

Anyway, you can’t expect the core team to never sell out, right? The fact is: when your protocol isn’t making money, you have to get it from somewhere. The foundation has to sell some of its tokens to pay for infrastructure, salaries, and a host of other expenses.

At least, paying operating expenses is one of the reasons for selling that I am willing to believe. Of course, there may be other reasons and different perspectives: on the one hand, their "dumping" hurts the community; on the other hand, after all, they built this protocol and created market heat, maybe they have the right to sell at least some tokens? Note that it is part, not all.

In the final analysis, this is a manifestation of the token/equity problem, and it is also the reason why crypto venture capital does not like equity. Compared with private placement or waiting for exit, selling in the public market is more convenient and the time cycle is shorter.

3. Token economics is not the core issue, the token itself is

It is clear that investors are increasingly inclined to invest in tokens rather than equity. We are in the era of digital assets, isn't it natural to invest in digital assets?

But this trend is not as simple as it seems. Interestingly, many founders themselves realize that their products may not really need tokens, and they prefer to raise funds through equity. Despite this, they still face two major challenges:

• As I said before, most crypto-native VCs don't like equity (it is more difficult to exit).

• Equity valuations are usually lower than token valuations, and people always want to raise more money.

This situation not only creates a dilemma, but also directly incentivizes teams to choose a token model. Token issuance attracts more investors because it provides a clear public market exit path, making it easier to raise money. For the team, this means higher valuations and more development funds.

The core equity value of your company is not affected. You can retain 100% equity while raising a lot of money through these "artificial" tokens. This approach also attracts a wider group of investors who are specifically looking for token investment opportunities.

Sadly, in 99% of the cases in the current environment, the token model makes retail investors poor and makes VCs rich. Or as Yash said: infrastructure/governance tokens are just meme coins in suits.

However, when TIA went live, it did bring huge returns to retail investors - from $2 to $20. People thanked the team for making them rich and staked tokens for various airdrops. Yeah, we had that time, it was the fall of 2023...

When the price started to fall, people suddenly started to spread a lot of panic about Celestia: rumors of abnormal team behavior, predatory token economics, ridicule of on-chain revenue, etc.

It's good to find problems and point them out, but it's too bad if those who once praised Celestia now regard it as a "dumping ground" just because of the price trend.

4. What can we conclude from this?

VCs are almost never friends with you. Their core business is to make money, your core business is to make money, and the core interest of VC LPs is also to make money.

Don't blame VCs for selling: their tokens are unlocked, they have full ownership of their assets, and they can naturally dispose of them freely.

The real blame should go to VCs who sell off and tweet bullish tokens: this is deceptive and should not be tolerated.

Business models should not be designed around token sales alone. Either come up with a profit model or stay non-profit with cutting-edge technology - if you do it well, the market will pay for it.

Token economics are transparent to everyone: if the team's tokens are unlocked, they certainly have full control over their assets. But if you are a firm believer in the project, large-scale sales are worth considering.

Equity investment is not popular, and some token valuations are inflated and lack indicator support.

Teams should attach great importance to token economics design at the earliest stage, otherwise they may pay a heavy price in the future.

Technical innovation has nothing to do with token prices.

When the K-line goes up, everyone is happy; when the K-line goes down, problems are exposed. If the same group of people are praising the project one foot and slandering it the next, that is the real tragedy.